The Indian Economy Blog

September 12, 2008

Advent Of The Indian Business Houses

Filed under: Business — Kiran @ 5:42 am

Do Indian business houses have cultural advantages that could help them trump their global counterparts?

In 1988 the Japanese economy was probably at the peak of its glory period. Many years after moving from a low-income to high-income nation within a generation, a feat unsurpassed in history, Japanese businesses were buying high-profile chunks of corporate America. Moreover the Japanese economy was posting much stronger growth rates that the US, which it was widely touted to takeover as the largest economy in the world.

It was against this backdrop that Akio Morita, the legendary co-founder of Sony, published Made in Japan, an autobiography of himself and his company. Being born in the ashes of WW-II Japan, Sony probably reflected the rise of Japan as best as any company. Thanks to its humble and conversational style, the book was a best-seller and reached millions. Importantly Morita makes several comparisons between the corporate culture in Japan, the US and even the Soviet Union, based on his own experiences.

Morita rightly predicted that the manufacturers in the Soviet Union, would not amount to much. But the comparison between the capitalist industrial societies of Japan and the US was most interesting, and not just because the US economy since then has proved more dynamic than the Japanese economy.

Among his many comparisons, one big difference that Morita pointed out, and as relevant to this discussion, was continuity. In Japan once someone joined a company they would be with that company for life. When Japanese companies expanded into America they were surprised at how easily people would jump jobs. Morita concluded that Japanese companies could take a longer term view because of the continuity the culture of lifetime employment fostered, whereas in the US there was more emphasis on shorter-term goals, as a CEO had little incentive in making investments that would only give returns after his/her successor took over.

Things have changed since then. The US economy, despite recent weaknesses, has firmly been the more dynamic and faster growing economy of the two, in the last two decades. Some of the Japanese companies that have managed to avoid the general slowdown are getting into the American instant gratification culture. Case in point is Sony itself where Ken Kutaragi, whose brain child the PS3 was, had to leave just before the PS3 won Sony the HD wars, and his successor saw the PS3 ascend to a much higher growth trajectory. So while the successor clearly benefited from Kutaragi’s long-term vision (using a humble game console to gain control of the living room), will he have the courage to pursue a similar vision himself? Probably not.

The lifetime employment concept did not just happen. In the auto industry, it was pioneered by Toyota. In a world dominated by the assembly line, it was crucial to the success of its Total Quality Management and Flexible Manufacturing methodologies, especially in a Japan that was just rebuilding. It helps the nurturing and retention of talent, especially when all companies in an industry adhere to a certain code of conduct regarding hiring policies. (In a manner of speaking the job market was cartelized.) Talent that is nurtured well enough strives for continuous improvement.

On the other hand, the best performing economies today have a highly dynamic job market. China allows very easy hiring and firing. The US has its trade unions but generally labor laws are far more corporate-friendly than those in Europe (where they favor the workers more). As we mentioned above Japan has a culture of hire-till-retirement.

Advent of the Indian Business Houses

As Indian-owned companies become global, they are doing so while sticking to keeping the companies within family control.

The concept of the business dynasty is not alien to the world. However, nowhere else is it as prevalent as it is in India. Virtually every major private-sector corporate group in India is family owned, and more importantly family-managed. In the early days of liberalization this was seen as a strong disadvantage in a world that swore by “professional management”. Companies like Nirma tried the professional management route, only to pull the reins back into the hands of the family. The Tatas, may appear the only exception, but remember that they too are a closely knit group (the Bombay Club?).

Essentially in the Indian context, the separation between ownership and management is smaller than anywhere else in the world. This is a good thing as long as the owners are good managers too, and increasingly the Ambanis, Mittals and Tantis are proving to be so. Moreover they have strong succession planning, usually within the family. The heirs get the best management education in the world, and are carefully nurtured to take over the reins when the time comes. Sounds like business dynasties? And there are probably strong reasons why business dynasties failed in the West, but pertinent our discussion, they provide the continuity at the highest level, so the companies can take bold long-term investment decisions. On the other hand, they can keep pushing the Government for liberal hire-and-fire policies, which would give their companies every labor advantage that their Chinese or American counterparts currently enjoy.

Conclusion

The Indian business dynasties are an interesting new phenomenon in the corporate world. Family-owned businesses around the world are not very unusual, but what is unusual is the strong owner involvement in management, with strong succession planning in the owner-cum-manager roles. This model probably combines the best of the continuity-flexibility conundrum and might trump the model of foreign corporate houses. On the other hand this might just be a passing phase in the management patterns in Corporate India, and if it is, then it is still significant enough to store away as a story for the grandchildren.

4 Comments »

  1. can u shed a little more light on as-to why the same family-owned system doesn’t really succeed in other nations? maybe it’ll help me understand this article better…

    Comment by Arayan Mehta — September 17, 2008 @ 3:39 am

  2. Business dynasties do not work in other parts of the world and have not worked in India either. Just look at a list of the top industrial groups in India 15 years ago and today – former top groups like the Mafatlals, Thapars, most factions of the Birlas (other than KMB)and the Wadias are nowhere in the league tables today. As the saying goes in the US, the first generation builds the business, the second generation takes it forward, and the third generation destroys it – for companies to sustain themselves at the top, they need professional managers. And the way so called family run groups like the Aditya Birla group are managed also serves to prove this rule – KMB has professionalised his group getting former managers from HLL and ITC who have helped take his business forward.

    Comment by unknown indian — September 27, 2008 @ 2:24 pm

  3. The Indian Business Family siblings are given the best of the best educations in Harvard, London Business School.AVB studied in Calcutta University but did his Chemical Engg from MIT, KMB went LBS, Anand Mahindra went to Harvard.
    In the past it was the Prince and Princes from the native Indian states used to go to Oxbridge, now it is the Indian Business Maharajas sending their son and daughters to the best B Schools/Engg colleges to get the best educations.
    If you have money, you can buy education in the west .It was in past practice in the west when the (rich and famous) lord family’s kid used to go to Eton and Harrows then to Oxbridge.
    They may not be like Bill Gates, Sergey Or Larry or Michael Dell, but can hire people who can manage the business for them.
    With Warm Regards

    Comment by Debashish Bramha — October 15, 2008 @ 1:42 pm

  4. It is very difficult to generalize even in US you have some superb very large family run companies like Bechtel.

    Comment by Shantanu Chatterjee — October 15, 2008 @ 3:34 pm

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